Thursday, December 24, 2015

There is a reasonably respectable theory (by comparison with
the universe thereof) which says that stock prices track hemlines (the Go Go 60s
and the grim early ‘70s e.g.) – and randomness is a prime culprit. Another
interesting line up comes from the building of sky scrapers.

Consider

1885 and the first seriously tall edifice… the Home Insurance
Building in Chicago

1907 the stock crash and up goes the Singer Building to lead
the leap skyward

1936 and the depths of depression brings us the Empire State
building (still the optimal height / yield mix)

1970s and the oil shock gave us the World Trade Centre and
Willis Towers

late 1990s and the Asian Financial crisis sees the Petronas
Towers pierce new heights

and the GFC in 2010 produced the record breaking Burj Khalifa
in Dubai

What is tougher to tell is whether the buildings preceded a
crash or were built shortly after in an attempt to inspire confidence. Too few
data points of course (but it’s Christmas).

The worry is that 2018 will see the tallest yet at 1,000m
Kingdom Tower, Jeddah opened. Precursor or sugar high? Clearly a skirt length
prediction called for.

Tuesday, October 27, 2015

A fine example of rubbish designed to grow stories not knowledge would be this mornings “death by bacon if the sausage hasn’t killed you” piece of melodrama drawn from the aptly named WHO.

We are told that an extra 50 grams of bacon will increase one’s chances of getting bowel cancer by 18% – and variants on those numbers. We are not told an 18% increase “over what”. Yesterdays consumption? Some unspecified existing average? Zero? Presumably Dr WHO tells us in his report and the mere detail has eluded the journalistic mind?

Getting only slightly more picky, how does this compare with a 50 gram increase in anything else? The only clue seems to be that processed meat is as bad as tobacco and arsenic. Most helpful I’m sure. Alarm and despondency is however as job preserving for WHO persons as it is for news inventers.

Of course living another day does indeed increase one’s probability of dying. What’s more the longer this living an extra day business goes on the more dangerous it gets.. A sure-fire means of preventing this is not to be born. More effective than any rasher avoidance scheme.

BTW the book, written in a less annoyed frame of mind than I write, may be foundhere in draft or buy at Amazon.

A humane Nobel economist

Princeton University Professor Angus Deaton has won the 2015 Nobel Prize in Economic Sciences, and it is a very worthy award. The 69-year-old Scottish-born economist has contributed to our understanding at a theoretical, empirical, and policy-relevant level throughout his very productive career. And he continues to challenge his fellow economists methodologically, analytically, and practically with new works. In many ways, this was a very inspiring choice.

Let me explain. Deaton’s first main idea was the basic one that people don’t eat growth rates: We learn a lot more from studying consumption behavior than we would from focusing our attention on aggregate income measures. It is a decidedly microeconomic approach to empirical analysis, and in so doing he innovated ways to conduct household surveys. And this way of measuring human well-being opened eyes to the plight of the world’s poor, and the economic improvements in global development. In many ways, Deaton’s work provides the scientific underpinnings of Hans Rosling’s BBC Four video, The Joy of Stats, on 200 countries, 200 Years or his TED Talk on the washing machine.

Deaton’s work made us see the impact innovation and development has had on the well-being of the world’s poor. In this sense, his receiving the Nobel is also a nod by the committee to economic history and the fundamental importance of development economics as a field as much as to the theoretical and empirical thrust of Deaton’s work on consumption behavior.

* * *

In addition to being a thorough thinker, Deaton is a bold one, and does not shy away from taking controversial positions. In his very accessible “The Great Escape,” he explains that the rising incomes of American CEOs may not be at all due to a culture of overpaying themselves, but a consequence that in the global marketplace, top English-speaking managers may be more like superstar opera singers or athletes, where the compensation reflects returns to super-sized talents in this new global marketplace.

Moreover, he explains that for studying questions of global inequality, the top 1 per cent in any one country is the wrong way to think about the issue. In tackling the issue, what matters is not within-country inequality, because the decisive factor in global inequality are the differences between countries.

The factors determining between-countries differences include size, talents, and restrictions on opportunity. And while within-country inequality may invoke political action, what effective measures could be done globally? There is no world government, and global institutions such as the World Bank possess neither the authority nor the ability to implement a global tax and redistribution policies.

* * *

The fact that the world is a better place than it ever has been is due to innovations and the expansion of trade and mobility. People across the globe are wealthier, healthier and live longer and happier lives. Deaton is neither a free-market fundamentalist, nor Panglossian about global economic development; there have been major setbacks in terms of disease, and natural and man-made disasters that have fallen on the world’s poor. A billion people still live in conditions of destitution, and millions of children still die due to the accident of their birthplace.

There is something policy-wise that can be done about this, especially with regard to global health. But foreign aid programs since World War II have not provided the answer as to how to help the least advantaged and most vulnerable among the world population.

Foreign aid faces a dilemma: If extreme poverty is a result of poor institutions and bad politics, giving money only sustains that offending government. If a country has the conditions for development in place, then aid is not required — trade and foreign direct investment will provide the resources for development. If a country is hostile to economic development, then aid will be ineffective and perhaps even harmful by propping up bad regimes.

Deaton, thus, falls more or less on the P. T. Bauer/William Easterly spectrum of thinking about the effectiveness of foreign aid to address the problems of facing less developed economies as has been practiced to date. But his is not a wholesale rejection of foreign aid. We just have to rethink the project and learn how to do it more effectively. As he wrote in a 2013 essay, “Weak States, Poor Countries”:

“The absence of state capacity — that is, of the services and protections that people in rich countries take for granted — is one of the major causes of poverty and deprivation around the world. Without effective states working with active and involved citizens, there is little chance for the growth that is needed to abolish global poverty.”

Unfortunately, the world’s rich countries currently are making things worse.Foreign aid — transfers from rich countries to poor countries — has much to its credit, particularly in terms of health care, with many people alive today who would otherwise be dead. But foreign aid also undermines the development of local state capacity.

Critical to Deaton’s thinking is the building of state capacity. In this sense, his work echoes an important theme of another Nobel Prize winner Douglass North, when North claimed in “Structure and Change in Economic History” (1981) that the state was both the greatest impetus for economic development and the greatest impediment.

* * *

In an essay published this past summer commenting on Easterly’s “The Tyranny of Experts,” Deaton agreed that “technological illusions” of development planners must be rejected. But Deaton also cautions that while development policy should, of course, respect the rights of the poor and encourage their participation in the democratic process of their own governments, it is a case of over-optimism and wishful thinking to believe that rights and democracy naturally lead to growth and prosperity.

Deaton’s position on these issues is perhaps best summed up in “The Great Escape”: “What surely ought to happen is what happened in the now-rich world, where countries developed in their own way, in their own time, under their own political and economic structures. No one gave them aid or tried to bribe them to adopt policies for their own good. What we need to do is to make sure that we are not standing on the way of the now-poor countries doing what we have already done. We need to let poor people help themselves and get out of the way — or, more positively, stop doing things that are obstructing them.”

Angus Deaton has advanced our understanding of wealth, health and well-being through detailed empirical examination of household consumption data and theoretical insights from microeconomics to political economy. The Nobel Prize committee chose wisely this year.

Peter Boettke is professor of economics and philosophy at George Mason University and director of the F. A. Hayek program for advanced study in philosophy, politics and economics at the Mercatus Center.

Wednesday, October 14, 2015

Maybe the most common oversight in the emotional arguments about foreign ownership and the apparently dreadful process of all “those profits” made from New Zealanders flowing out and away lies in the failure to recognise that risk is flowing away too.

It is the overseas owners who are bearing all that New Zealand generated risk.

We repatriate risk just as we repatriate profits. Australian shareholders bear the risk of running trading banks in NZ. The impact of a heap of defaults comes to rest at the feet of Australian investors.

In a generally competitive market risk ends up being born by those who are best at bearing a given type of risk – so risks kiwis are not good at managing flow offshore as well as profits to be made by taking them.

Again with banks – NZ can bear some banking risks… that is why TSB and Co op Bank and in some areas Kiwibank can operate as successfully as they do. But there is a scale and scope at which it makes more sense to enjoy the customer and depositor benefits here in NZ while exporting the risk and profit.

Tuesday, September 29, 2015

This is plausible and reasonable but for the fact of institutional investment vehicles and institutional arrangements competing to drive down this effect… worth considering before abandoning the textbooks though…

What if the rich get richer because they know how to invest their money more effectively? New research shows that this may be a factor behind the rise in inequality.

Different investors have different levels of sophistication. Why?

It might come from varying levels of education. For example, I know what diversification is, and why it works. But other people might not, and might just pick one or two stocks, increasing their risk without boosting their expected return. Research shows that this is one of the biggest mistakes that people make, if not the biggest.

Differences in education are dangerous because unsophisticated people generally don’t realize they’re unsophisticated. When you’re ignorant, you also usually don’t realize how ignorant you are. In psychology, this is known as the Dunning-Kruger effect. People might learn investment basics from their parents, or from their jobs, or from their hobbies. But if you weren’t lucky enough to learn about investing, how would even know what you were missing?

This is a problem no matter where you are in the spectrum of financial sophistication. I probably know one or two Wall Street traders who don’t realize how much more they have to learn.

Another reason for information differences is that you can actually buy information with money. The wealthy and the well-funded have access to expensive financial data, which will generally help them earn higher returns. The poor, unable to buy data, will earn lower returns. Thus, the initial differences in wealth will compound over time, with the rich getting richer faster.

Finance researchers Marcin Kacperczyk, Jaromir Nosal, and Luminita Stevens realize that differing levels of sophistication are a fundamental, inevitable feature of financial markets. In a new paper, they investigate the effect that this will have on the distribution of income inequality. They find, perhaps unsurprisingly, that more sophisticated investors tend to get more capital income in the form of capital gains when their portfolios rise in value, dividends, interest payments and the like. Basically, if you’re a better investor, your money will make more money. The effect is made worse because sophisticated investors are able to snap up valuable assets quickly, pricing the unsophisticated out of the market, or leaving them to pick up the scraps.Income Inequality

And of course, that compounds over time. Income inequality will eventually turn into wealth inequality. Differences in investor sophistication will contribute to the future envisioned by economist Thomas Piketty, where the rich keep getting richer as their capital turns itself into more capital.

But Kacperczyk et al. have an even more worrying message. They show that it isn't just differences in investor sophistication that drive inequality. As society’s average level of sophistication goes up, information-driven inequality may increase. This will happen if informational advantages build on each other -- the more you know, the better you understand how to learn more. If that’s the case, then educating the general populace about finance might actually exacerbate inequality, instead of correcting it.

Kacperczyk et al. marshal some data in support of their unsettling theory. For example, they compare the performance of sophisticated investors -- investment companies and investment advisers -- to others, and find that the former have been beating the latter at least since the early 1990s. Here is their graph:

They also find that sophisticated investors have been taking over the stock market, just as their model would predict:

The rise in stock ownership by sophisticated investors probably corresponds to the information technology revolution, which made financial data more widely available. Stocks tend to have higher returns than other assets, so if this continues to be true, the financial future belongs to the sophisticated.

Now, Kacperczyk et al.’s theory is complicated, with a number of assumptions and moving parts. Though they do gather some facts that generally fit with the model’s predictions, it doesn’t mean the model is true.

But it should definitely be cause for worry. It provides a concrete, plausible mechanism for a Piketty-type dystopia, in which the natural tendency of financial markets is to make inequality explode. And it’s especially worrying because it implies that financial education, of the type urged by many finance researchers, might compound the problem instead of fixing it.

So how would we prevent dystopia, in a world where initial differences compound themselves? Taxation of capital income is believed to be one of the most economically harmful kinds of taxes. An alternative might be a higher inheritance tax. Outside of the tax system, government efforts like a sovereign wealth fund might be employed to distribute the benefits of capital income more equally. But all of these solutions involve heavy government distortions of the economy. This almost ensures that many economists, along with a large part of the voting public, will be hesitant to give them a full-throated endorsement.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Inspectors of inputs, persons wielding clipboards and ticking boxes are no panacea and often find it as hard to get buy in as a Parking Warden finds feeling the love.

Once the “input” is ticked people have no incentive to keep trying. Outcome based regulation which says “we don't care how you get there but by God you better make it or we will hang you” allows at least two productive things to happen:

There is good reason to keep on trying, innovating, training and doing absolutely whatever to get safe. Insurers know that too and pressurise policy holders; and,

Where amorphous and intangible factors like a “culture of safety and good occupational health” are critical – as in this case – there is an incentive to build, develop, grow and maintain such a culture. Ticking a box marked “culture” never did anything.

It does require two things governments can be good at when they want to be – setting clear standards and enforcing them. Best will in the world governments can never be the best at picking winners.

Monday, August 17, 2015

Greg Mankiw, in a recent NYTbook review notes that Arthur Brooks 2006 book “Who Really Cares” shows how in the U.S., media headlines notwithstanding, households headed by conservatives give, on average, 30 percent more dollars to charity than households headed by liberals, even though their incomes on average are 6 percent lower. They are also more likely to be blood donors.

So why do so many people view liberals as more compassionate than conservatives? The problem, in Brooks' view, is that conservative policy arguments, while cogent if fully explained and digested, are too extended to be useful in a political dynamic dominated by first impressions based on 30-second sound bites.

For example, take the proposal to increase the minimum wage. Conservatives have many reasons to believe that it is the wrong way to help the working poor.

Second, because some of the costs of a higher minimum wage are passed on to consumers in the form of higher prices, it hurts those who buy these goods and services, like meals at fast-food restaurants. The economist Thomas MaCurdy of Stanford University reports that this price effect “is more regressive than a typical state sales tax.”

Third, the minimum wage is not well targeted to those living in poverty. Of workers affected by an increase in the minimum wage, more than half belong to families making more than $35,000 a year, and almost a quarter belong to families making more than $75,000 a year. If we were evaluating a government spending program to combat poverty, no one would be satisfied if so many of the program’s beneficiaries were already living well above the poverty line (about $24,000 for a family of four).

Fourth, there is a better way to help the working poor: the earned-income tax credit. This income supplement is well targeted to families living in poverty, it does not raise the prices of goods and services produced by low-wage workers and it does not discourage firms from hiring these workers. By incentivizing work, it increases the number of people enjoying earned success.

All of the above holds for NZ.

Arguments like these are persuasive and are hardly the ravings of red necked idiocy. But they do not fit neatly on a bumper sticker. This stuff appeals only to policy wonks, who represent a tiny fraction of the electorate.

“It’s time to give America a raise.” is how President Obama explained why he wants to increase the minimum wage.

Such a great sound bite plays well on the evening news. Of course, it does not rebut any of the arguments against a higher minimum wage, but it carries a clear implication: The president’s political opponents don’t think America deserves a raise. They are the mean, greedy types and it’s their fault we have poverty..

The NZ media are full of this sort of “easy sell, lazy write” material…. the costs of producing this stuff is low so supply is high.